NTS' CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: NTS Inc (NTS)


Q42012 Earnings Call

March 22, 2013 10:00 am ET


John Nesbett - Investor Relations, Institutional Marketing Services

Guy Nissenson - Chairman of the Board, President, Chief Executive Officer

Niv Krikov - Chief Financial Officer, Principal Accounting Officer, Treasurer


Katie Parish - Northwest Management

Aaron Fuchs - Fertilemind Capital


Greetings. Welcome to the NTS Inc. fourth quarter and year-end 2012 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer-session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Nesbett Institutional Marketing Services for NTS Inc. Thank you, Mr. Nesbett. You may begin.

John Nesbett - Investor Relations, Institutional Marketing Services

Good morning and thank you for calling in for NTS’ fourth quarter and year-end conference call. Speaking on the call are Guy Nissenson, President and Chief Executive Officer and Niv Krikov, Chief Financial Officer.

In today's morning's call, there is a slide presentation available that you will want to access. The presentation can be accessed at the NTS website at www.ntscom.com. The webcast can also be accessed at www.investorcalendar.com.

I will take a moment to read the Safe Harbor statement. This presentation may contain forward-looking statements. The words or phrases would be, will, allow, should and tends to will likely result, or expected to, will continue, is anticipated, estimate, planned, project or similar expressions are intended to identify forward-looking statements.

Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties. These risks and uncertainties include issues related to the ability to obtain sufficient funding to continue operations, maintain them for cash flow, properly exploit new business, license and sign new agreements, issues related to rapidly changing technology and evolving standards in the industries in which the company and its subsidiaries operate. The company's ability to compete effectively and adjust to rapidly changing market dynamics and the unpredictable nature of consumer preferences and other factors set forth in the company’s most recently filed annual report and/or registration statements.

In addition, these and other factors may cause financial results to fluctuate from one financial quarter to another. Statements made herein are as of the date of this presentation and should not be relied upon during subsequent dates. The company cautions not to place undue reliance on such statements.

Unless otherwise required by applicable law, we do not undertake and we specifically disclaim any obligation to update any forward-looking statements to reflect the events or developments, unanticipated events or circumstances after the date of such statement. You should carefully review the risks and uncertainties described in other documents that the company files from time to time with the Securities and Exchange Commission.

Okay. With that out of the way, I would now like to turn the call over to Guy Nissenson. Go ahead, Guy.

Guy Nissenson

Good morning, everyone. 2012 was an excellent year for NTS and our fourth quarter continues to reflect the progress we are making. Our entire company is very focused on building out the remaining markets in Texas and Louisiana and of course selling into them.

On slide four of the presentation, you can see that fiber revenue grew 34.8% with a 27% increase in EBITDA to $3.2 million. Importantly, we are well into the first quarter at this junction and we have already added over 600 fiber customers for January and February, well ahead of the 369 customers we added in the entire fourth quarter.

I will turn the call over to Niv who will provide the data financial. Niv?

Niv Krikov

Thank you, Guy and good morning. For my presentation, I will focus on the fourth quarter.

On slide five, you will see that from a revenue standpoint, FTTP revenues grew by 34.8% while our legacy business decreased by 9.2%. This is consistent with our overall strategy of driving growth in our new higher margin fiber business while trying to minimize loss of revenues in our legacy markets.

You will also see that cost of services decreased as a percentage of sales from both the quarter and the year due to a larger percentage of FTTP revenues. FTTP revenues generated higher margins since we own the fiber network and are not required to pay third party for use of their network.

We are very focused on driving down cost in the business as demonstrated by our ability to reduce SG&A quarter-over-quarter. For the year, SG&A, as a percentage of revenues, was reduced by 1% and by 4.6% when comparing the fourth quarter to the same period of last year.

Financing expenses for the quarter was $1.7 million, up from $549,000 in the fourth quarter of 2011. The increase was related to new advances of long-term loans from the United States Department of Agriculture in non-recourse capital and the valuation of the U.S. Dollar to the New Israeli Shekel.

In the fourth quarter of 2012, we reported a reduced net loss of $249,000 or $0.01 per basic and diluted share, assuming 41.1 million shares outstanding. That compares to a net loss of $587,000 or loss of $0.02 per basic and diluted share in the fourth quarter of 2011. The reduction in net loss is due to the growth in our higher margins fiber business and reduced expenses.

On the EBITDA basis, we saw a considerable improvement to EBITDA or $3.2 million in the fourth quarter of 2012 as compared to $2.5 million for the same period in 2011. The EBITDA margin improved to 21.4% compared to 17.2% in the fourth quarter of 2011.

Turning to the balance sheet on slide six. As you know, we are in a transitional period as we aggressively invest in our fiber network. Factors such as government financing, metro build and marketing expenses when rolling out new market resulted in a working capital deficit. Overtime we expect this deficit to become positive as we our customer base. Furthermore, please note that the $35 million of our debt in notes payable to the USDA is low cost, non-recourse capital provided on a favorable term.

I would now turn the call back to Guy.

Guy Nissenson

Thank you, Niv. On slide seven, you can see the progress we have been making over the past years growing our fiber business and its impact on our profitability margins. The top chart is our overall fiber growth including our network in Lubbock and you can see the steady growth since 2010. You would note that, as I discussed earlier, we expect to see improved revenue growth in the first quarter ending March.

On the bottom left, you can see the growth in our new fiber markets that are, for the most part, being funded by grants and low cost capital from the Federal Government Stimulus plan. Importantly, on the bottom right, you can see the impact that this fiber growth has had on our EBITDA margins since 2010.

On slide eight, you can see some of the key metrics of our business. We currently have a 21% penetration rate of our passings, with the big portion of the passings completed recently. Our target is to at least double that penetration rate over time and the primary focus of the company right now is marketing our fiber product. For example, I just returned from Louisiana where we initiated a very strategic marketing effort which we expect will help us to reach high penetration rates in the next few quarters.

While residential is a key part of our business, business customers have always been higher margins. There is a very high need for broadband in the business sector. This is reflected in the higher ARPU and lower churn in that portion of our business.

Slide nine shows our overall fiber footprint. You can see that our market are clustered in West Texas and Louisiana. We have spent a lot of time studying the markets that we are building out. The second tier markets, while not (inaudible) give us the best mix of both desirable business and residential areas while having limited competition.

Slide 10 focuses on the Texas market and the progress we have made. You can see that the light blue towns are the ones we are in the process of building out in 2013. Specifically Hale Center, Abernathy, New Deal and Iowa Park. All the other towns have been buildout as of December '12.

We also did a metro build, the gray dot which represent Wichita Falls. This was a project that we funded through outside sources to leverage our fiber network and access primarily business customers in that area.

On slide 11, you can see our Louisiana market. Building out the Louisiana market is a major initiative as we continue to expand in 2013. As I mentioned earlier, I have preferably been spending time there making sure the construction is on track and beginning the selling process to new customers. We are encouraged by the progress we are making in the Louisiana region and is targeting with respect to cost saving customers.

One slide 12, you can see the new directors that came on to our board in December. We have made steady progress from a corporate governance standpoint over the past few years and are particularly pleased with the caliber and enhanced board which brings vast experience from both the industry and investment standpoint.

Before I turn this conference to Q&A, I would like to recap on slide 13 the three macro trends that are very important to keep in mind when assessing the long-term opportunity for this company.

First, secondary market broadband is a very attractive and growing market. Three out of every 10 people in the United States still do not have access to broadband and broadband is becoming more and more essential. NTS is playing an important role in bringing it to America and it is an attractive growth opportunity.

Second, consumers' broadband needs are increasing at an incredible rate. Bandwidth usage is expected to increase tenfold by 2020. We do not believe that any technology is faster or better quality than fiber. So NTS is well positioned to complete the bandwidth needs in the markets it serves.

Related to this, the trend of internet TV is picking up momentum and this will further help NTS. Fiber providers are the best solutions for online delivery to the market they serve and specifically NTS where we build the fastest fiber network as well. We feel that we are very well positioned to benefit from this powerful trends in the market place.

In conclusion, this was a solid quarter for us. we will aggressively drive fiber growth and expect to continue to see our business shift to higher margin fiber customers, while finding ways to protect our legacy markets. We will continue to selectively evaluate metro build like we did in Wichita Falls to identify additional opportunities that can expand our network and add value to our shareholders. Finally, as we demonstrated in the quarter, we will continue to manage our costs to drive value and improve our financial metrics.

I would like to turn the call over to Q&A, and operator?

Question-and-Answer Session


Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Our first question is from the line of Katie Parish with Northwest Management. Please proceed with your question.

Katie Parish - Northwest Management

Good morning, guys. So it seems like fiber growth is really picking up. If you could just give some additional insight into that momentum that we have been seeing?

Guy Nissenson

Yes, with pleasure. So as we grow our footprint in fiber areas, we are seeing an increased penetration rate and net additions on fiber. I can give you, illustrate it with numbers. So for example, in October, we grew over September by only 69 net fiber customers. By November that number was 188. From December to January we already grew by 296. From January to February that number is 349.

So it seems like the new market has been recently opened. It is very receptive to our product. The first quarter of 2013, we are going to grow almost by three folds over the fourth of 2012, which is an encouraging metric.

Katie Parish - Northwest Management

Okay, great, thanks. That was very helpful.


Thank you. (Operator Instructions). The next question is from the line of Aaron Fuchs of Fertilemind. Please proceed with your question.

Aaron Fuchs - Fertilemind Capital

Hi, Guy, Niv. A couple of questions. One is, most of the networks are now being buildout. Isn’t it safe to assume that this working capital deficit will be cured in the near future? Is that a way we can think about that? Or you can give us guidance on?

Guy Nissenson

As we grow the network and spend money on growing, obviously that created a deficit on our working capital. We need to grow EBITDA to a level where it will have all of out fixed charges. As we grow in to those communities, that will enable us exactly to do that and to start covering that working capital deficit. We believe that as we grow EBITDA that will happen and hopefully in the next few quarters.

Aaron Fuchs - Fertilemind Capital

Okay, and the other, I have always been a little worried about these metro buildouts because of the high cost of capital that you have. Why are you so comfortable with them? What are you seeing in those specific buildouts that gives you comfort that you can cover that cost to capital?

Guy Nissenson

So first, when we do a metro build usually it is leveraging on our existing networks, knowledge, abilities, common SG&A. So the cost of doing a metro build is much lower than if we go into a completely new market or a completely new line of business. With regards to the specific metro builds that we are doing, those are focused on business only. For example, in Wichita Falls, we are targeting about 1,000 plus businesses.

The take rates that we have seen so far in those metro builds have been very high and their ROI based on those take rates are very quick. So it will allow us to grow EBITDA even further and that, if you look at the future of NTS, is to actually go and identify additional metro builds which will enable us to grow our business footprint.

In terms of the specifics on the numbers on the ROI, you can look at calculation. If we manage to go into 1,000 signup, 300, 400, 500 of those businesses which is about 30% to 50% we can call with a higher output than the residential, then obviously a higher margin, the return on the marketing investment and also on the buildout investment is very quick.

Aaron Fuchs - Fertilemind Capital

And what is, you mentioned in response to a previous caller's question that the new markets are doing better than the first 10 markets. Is there any sense of what is different between the two different cohort?

Guy Nissenson

The reason is we have a bigger base. So its allowing us to sell into all of the base and grow the sales.

Aaron Fuchs - Fertilemind Capital

A bigger base?

Guy Nissenson

On the interim.

Aaron Fuchs - Fertilemind Capital

Meaning now that you have bigger base of market overall, that you are growing.

Guy Nissenson


Aaron Fuchs - Fertilemind Capital

Okay. So the growth rate is effectively the same? Is that what you are saying?

Guy Nissenson

No. The growth rate, obviously, in the new markets is higher. We have the early adaptors signing up. We had, on the fourth quarter, some installation and construction delays and we are not seeing it in Q1. So we opened up quite a lot of markets and the ability to install. And that’s helping us in as we speak to grow the business.

Aaron Fuchs - Fertilemind Capital

Okay. Thanks a lot. Thanks for your time.

Guy Nissenson

No problem.


Thank you. I would now like to turn the call over management for closing remarks.

Guy Nissenson

Thank you all for participating today. I hope you liked the new format with the slides and then hope see and hear you all in the next presentation. Thank you all.


That concludes today's teleconference. You may disconnect your lines at this time.

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